Thomas and Naaz decision

  • The New South Wales (NSW) Court of Appeal has rejected the taxpayer’s leave to appeal in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2023] NSWCA 40 (Thomas and Naaz). The taxpayer was seeking to appeal NCAT’s decision that the taxpayer was liable to payroll tax under the ‘relevant contract’ rules of the Payroll Tax Act 2007 (NSW) (Payroll Tax Act) in respect of distributions of Medicare benefits to medical contractors.
  • The Court of Appeal unanimously dismissed the taxpayer’s application for leave to appeal. This was on the basis that the taxpayer’s application for leave did not identify any question of law raised by the previous decisions of the Tribunal. While a question of law was not technically engaged by the taxpayer’s application, the Court of Appeal’s decision addressed a number of noteworthy issues in any event.
  • The key takeaway is that most (if not all) medical contractor relationships in health care centres are likely to be captured by the ‘relevant contract’ rules of the Payroll Tax Act (and therefore subject to payroll tax). The relevant contract rules do, however, contain a number of key exemptions (none of which were considered by the Court of Appeal in Thomas and Naaz). Businesses will need to assess the application of these exemptions in each financial year in order to determine their liability to payroll tax.

Services were provided from the medical contractors to the taxpayer

The taxpayer engaged medical contractors under a facilities and services-type arrangement. Under this arrangement, the taxpayer provided medical contractors with access to its medical centres, nursing and administrative staff, and billing support in exchange for a fee (being 30% of the Medicare benefits that were earned by the contractors). Instead of finding that the taxpayer operated a business of providing facilities and services to doctors (which would be consistent with the provisions of the facilities and services arrangements), the Court determined that the taxpayer operated a ‘medical centres business’. The Court held in this context that it was ‘perfectly plain that the medical practitioners provided services to the [taxpayer]’.

In reaching this conclusion, the Court made the following observations:

40. The applicant was running a business. Central to its business was the notion that people would attend its centres in order to receive medical treatment. To that end the applicant provided the premises, and employed administrative and receptionist staff. It was also to that end that the applicant employed nurses who also provided services to patients.

43. Unquestionably the medical practitioners provided valuable contractual promises to the applicant, which were conducive to the conduct of the applicant’s business. The performance of those promises required positive actions by the medical practitioners on a continual basis while the contract was in force. It is no strain of language to regard the totality of the performance by the medical practitioners (including the provision of medical services to patients, but extending to the other promises in the contract such as attending the medical centre, adhering to its protocols and taking leave as permitted) as amounting to the provision of services to the applicant. Indeed, it does not strain language to regard the provision of medical services to patients as amounting also to the provision of a service to the applicant, in order to permit it to operate its medical centre business (and without which services the applicant would be unable to operate its business).

These comments demonstrate that – at least in a payroll tax context – courts are willing to look through the parties’ written characterisation of the arrangement in order to impute a service flow from the contractor to the principal. A payment ‘for or in relation to the performance of work’ can be more readily found as a consequence. The Court confirmed the breadth of this phrase by stating ‘[t]he provision of medical services by the practitioner to a patient is plainly the performance of work, and equally plainly it is work relating to the relevant contract’.

Commentary on alternate billing arrangements

In the case, the Chief Commissioner did not assess amounts paid directly to medical practitioners who administered their own claims and did not participate in the administrative arrangement conducted by the taxpayer as contributing to taxable wages. The taxpayer relied on this to argue that the construction of the relevant contract provisions adopted by the Chief Commissioner was ‘absurd or capricious’. The Court rejected this submission, stating that:

Division 7 of Part 2 [of the Payroll Tax Act] extends the scope of the concepts of “employer”, “employee” and “wages” so as to expand the basis upon which payroll tax is assessed. It does so in quite artificial ways. One of the elements upon which the deeming provisions operate is the making of a payment by the (deemed) employer to the (deemed) employee. The administratively convenient approach adopted by the majority of medical practitioners meant that there was a payment made by the [taxpayer] to those medical practitioners. The approach taken by the other three meant there was no payment, and so the deeming provisions were not engaged. That result does not bespeak error in the application of Division 7 to the majority of medical practitioners who did receive payments from the [taxpayer].

The Court also noted that ‘[a]s is clear from the position of the three practitioners who processed their own claims for medicare benefits, there is a ready mechanism to avoid [the] result [of payroll tax arising under the deeming provisions in Division 7 of Part 2 of the Payroll Tax Act]’. This suggests that a medical centre operator may be able to avoid the incidence of payroll tax if its medical contractors bill patients directly rather than using the medical centre as a billing arrangement.

The Court did not, however, consider the operation of section 46 of the Payroll Tax Act to arrangements of this nature. That section can deem payments from a third party to a contractor to have been made by the deemed employer. This means that payments from patients directly to medical practitioners could still be deemed to have been ‘paid’ by the medical centre operator to the practitioners. If this finding was made, the deemed payment would be subject to payroll tax.

Queensland medical centre amnesty

In a further payroll tax development, Queensland approved the Administrative Arrangement Temporary payroll tax amnesty measure in relation to payments made to general practitioners under the relevant contract provisions on Wednesday. The amnesty has been offered to medical centres in the face of sustained criticism over Queensland’s Revenue Ruling PTAQ000.6.1, which suggests that most medical contractors should be subject to payroll tax (unless an exemption applies).

While an amnesty from payroll tax will be available to payments made to medical contractors until 30 June 2025, the amnesty has a number of key limitations and conditions. In particular:

  • the amnesty is limited to payments to doctors who are registered as a general practitioner with the Medical Board of Australia. Unfortunately, the amnesty is not available to other medical doctors or allied health professionals;
  • the amnesty is not available to medical practices that commenced operation on or after 10 February 2023; and
  • the amnesty is not available to medical practices that have ‘been lodging and declaring payments to contracted GPs for payroll tax purposes before 10 February 2023, without being subject to audit activity’.

Curiously, this means that medical practices with a history of non-compliance with the ‘relevant contract’ rules will be eligible for the amnesty up until 30 June 2025, but those that have historically complied with their obligations will continue to stung with the tax during the amnesty period.

Medical centres are required to complete an expression of interest by 29 September 2023 in order to be eligible for the amnesty. Medical centres applying for the amnesty must also make a ‘voluntary disclosure’ which must include ‘all of the information the Commissioner considers is necessary to properly determine the practice’s payroll tax obligations’. If a medical centre fails to comply with this, or any other eligibility criteria, the Commissioner can decide that a medical centre is not eligible for the amnesty. This decision is not reviewable.

The Queensland Office of State Revenue also had this to say about the amnesty:

From 1 July 2025, medical practices that did not participate in the amnesty may be subject to compliance activity. As the amnesty effectively overrides the audit limitation period previously announced by the Acting Commissioner, any compliance activity would not be limited to the 2021-22 and subsequent financial years.